Brexit Impact 2: Luxembourg Transitional Regime

Many firms in the United Kingdom do business with Luxembourg on a cross-border basis. Luxembourg is one of the principal “low tax” jurisdictions within the European Union (EU) and consequently the continuation of financial services business between the two jurisdictions is of paramount importance.

To this end, Luxembourg has passed “Brexit Laws”, which make provision for temporary continuation of existing cross-border business from the UK. Under the current assumption that Brexit will happen on 31 October 2019, any notifications to the Commission de Surveillance du Secteur Financier (CSSF – the Luxembourg regulator) to utilise the transitional regime must be made by 15 September 2019. These notifications can be made utilising the CSSF’s eDesk portal.

The CSSF has set the transitional period at 12 months following a hard Brexit.

Included in the transitional regime

Firms providing cross-border services under the following directives may be allowed to participate in the transitional regime:

  • Capital Requirements Directive (CRD)
  • Markets in Financial Instruments Directive II (MiFID II)
  • Payment Services Directive 2 (PSD2)
  • Electronic Money Directive (EMD)

Additionally, funds (and their managers) sold cross-border under the following directives may be allowed to participate in the transitional regime:

  • Undertakings for Collective Investments in Transferable Securities (UCITS)
  • Alternative Investment Funds Managers Directive (AIFMD)

However, it should be noted that participation in the transitional regime is not automatic and will require assessment by the CSSF.

Transitional Regime – Services

Whether a UK firm is allowed to apply the transitional regime follows assessment by the CSSF, as stated above. Following its assessment, the CSSF will inform each UK firm as to whether they can benefit from the transitional regime.

To apply for participation in the transitional regime the UK firm must already be providing the services on a cross-border basis into Luxembourg. Furthermore, the transitional regime will only apply to contracts that have entered into force before Brexit (“existing contracts”) and contracts concluded after Brexit with close links to existing contracts (“closely-related contracts”).

A UK firm that intends to continue providing services into Luxembourg post-Brexit either (1) on an ongoing basis and/or (2) with the intention of forming new contracts should submit an application for authorisation to the CSSF as soon as soon as possible. It should be noted that authorisation can take up to 12 months following receipt of a complete application file.

UK firms not participating in the transitional regime and that have not been granted authorisation must cease all activities in Luxembourg from the date of a hard Brexit.

Transitional Regime – Funds and their Managers

Immediately following a hard Brexit UK funds and UK Managers will no longer have access to the passport regimes under either UCITS or AIFMD. UK funds (whether UCITS or Alternative Investment Fund (AIF)) will become non-EU AIFs and UK Managers will become non-EU Alternative Investment Fund Managers (AIFMs).

All UK funds and managers (UK entities) must notify the CSSF of their intention and the way that they intend to continue to provide services in Luxembourg by 15 September. This initial notification must be followed up with any application for authorisation, notification or other information by 31 October 2019.

The two options for a UK funds will be:

  • To give notification that it will be sold to professional investors in Luxembourg under Article 42 of AIFMD (Article 100(2) of the Law of 17 December 2010)
  • To apply for authorisation to be sold to retail investors as an individually registered fund under Article 43 of AIFMD (Article 100(1) of the Law of 17 December 2010)

It should be noted that at time of writing there is only one non-EU AIF registered for retail sale in Luxembourg and only four AIFs in total (EU and non-EU) are registered for such retail sale.

On the basis of the information and applications/notifications submitted the CSSF may, on a case-by-case basis, allow funds and/or their managers to continue their activities in Luxembourg on a temporary basis under the transitional regime. The CSSF will inform such funds and their managers within 10 business days of submission of the required information.

Entities that have already submitted an application for authorisation must still submit the Brexit notification.

Still to come

The CSSF is expected to communicate any transitional provisions that may apply to UK investment funds being included in investment portfolios that have restrictions on their non-EU investment holdings. This is expected to allow a regime where, for a temporary period, the UK investment fund holdings may continue to be counted under the “EU” portion of the investment portfolio.

AIFMD – Third Country Regime

In the event of a hard Brexit, or no agreement being reached on the cross-border selling of investment funds under the EU passport regimes, funds in the UK will have to become non-EU (third country) Alternative Investment Funds (AIFs) under the Alternative Investment Funds Managers Directive (AIFMD). Similarly, UCITS Managers and Alternative Investment Fund Managers (AIFMs) in the UK will become non-EU (third country) AIFMs under AIFMD.

This brief note sets out the key points of the non-EU (third country) retime under AIFMD.

It should be noted that any references to UK AIFMs or UK AIFs could also be applied to AIFMs and AIFs established in Gibraltar. It should be further noted that any reference to the EU can also be extended to Iceland, Liechtenstein and Norway, which whilst not in the EU are part of the European Economic Area and subject to AIFMD.

EU AIFMs selling UK AIFs to professional investors in the EU

This is covered under Article 36 of AIFMD and is one form of the National Private Placement Regime (NPPR).

Article 36 requires that the non-EU fund (AIF) is managed by an EU-based AIFM. There are two main requirements:

  • The non-EU AIF cannot be established in a third country that is listed as a Non-Cooperative Country/Territory by the Financial Action Task Force (FATF)
  • Appropriate cooperation arrangements must be in place between the EU country where the AIFM is established and the third country where the AIF is established – it is expected that the UK will sign such cooperation arrangements with most EU member states

It should be noted that unlike the AIFMD EU passport (under Article 32) the access to a host EU state for marketing under Article 32 of AIFMD is not automatic and is certainly not harmonised. Each EU member state can put in place their own requirements for registration or notification. There may also be a higher cost to Article 32 registrations than there would be to utilising the AIFMD passport in the same country.

UK AIFMs selling EU or non-EU AIFs to professional investors in the EU

This is covered under Article 42 of AIFMD and is the other form of NPPR.

Article 42 has three main requirements:

  • The non-EU AIFM (and where appropriate the non-EU AIF) cannot be established in a third country that is listed as a Non-Cooperative Country/Territory by the Financial Action Task Force (FATF)
  • Appropriate cooperation arrangements must be in place between the EU country where the AIFs are to be marketed and the third country where the AIFM (and where applicable the AIF) is established – it is expected that the UK will sign such cooperation arrangements with most EU member states
  • The non-EU AIFM must comply with Articles 22 to 24 (and where appropriate Articles 26 to 30) of AIFMD

As noted under the previous section, NPPR is not automatic and not harmonised. Not only can each EU member state put in place their own requirements for registration or notification but some EU member states (such as Latvia, Greece and Italy) have not implemented Article 42 and therefore NPPR under Article 42 is not possible in these jurisdictions.

Sales to semi-professional investors in the EU

Again, sales to high net worth investors, sophisticated investors and other forms of semi-professional investors is not harmonised throughout the EU and each country will have its own method of dealing (or not dealing) with these investors.

Some EU countries (e.g. Netherlands, Denmark, France) allow funds registered for NPPR under Article 36 and Article 42 to be sold to semi-professional investors. Each jurisdiction will set a minimum investment level. In some EU member states there will be a requirement for a separate document or letter to be signed by the investor confirming their status. This is similar to the Financial Conduct Authority Regime for Non-Mainstream Pooled Investors (NMPIs).

Other EU countries (e.g. Austria, Germany, Sweden) may require a separate registration for semi-professional investors that is beyond the requirements for an Article 36 or Article 42 registration.

Some EU countries may not make provision for semi-professional investors. Each country in the EU should be looked at on a case-by-case basis.

Regardless of the method for enabling sale to these investors, it should be noted that a Key Investor Information Document (KIID) will normally be required under the Packaged Retail Investment & Insurance Products (PRIIPs) Directive.

Sales to retail investors in the EU

An area for least harmonisation, only certain EU countries allow for AIFs (whether EU or non-EU) to be sold to retail investors. Where this is permitted it will be subject to the highest level of restrictions and registration.

Article 43 of AIFMD allows for each EU jurisdiction to determine (1) whether they want to allow for AIFs to sell to retail investors in their country and (2) what authorisation/registration requirements are in place for such access.

In cases where retail registration is allowed it should be expected that the forms will be long and invasive and any fee will be dramatically more than similar UCITS registration.


Going forwards any access to the EU for UK fund managers and UK funds will require significantly more work that is currently required. Furthermore, easy access routes may not be found to all EU jurisdictions. The expectation that UK-based fund managers will be more selective in their EU marketing process.

Midshore Consulting specialise in the cross-border distribution of funds, and have extensive experience with non-EU funds. Please contact us for assistance.

Brexit Impact: Selling Funds into the UK – [Article]

Brexit may have been delayed, however it is still on the horizon. The potential impact it may have on the cross-border provision of financial services and products, particularly in the case of a “no deal” Brexit, is significant given that provision of such services and products both from the European Union into the United Kingdom and vice versa currently operates under a series of EU Directives.

At present time the majority of foreign funds sold into the UK come from the EU, predominantly from Ireland and Luxembourg. This is because funds from EU countries can “passport” into the UK either for sale to retail investors under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive or for sale to institutional investors under the Alternative Investment Fund Managers Directive (AIFMD).

Non-EU foreign funds have other routes for sale into the UK. For selling to retail investors a fund must register under section 272 of the Financial Services & Markets Act, 2000 (FSMA). This is far more onerous than the UCITS passport process and requires completion of a 25-page form, a recognition process that may take up to six months, and payment of a fee of up to £8,000. A Key Information Document (KID) under the Packaged Retail and Insurance-based Investment Products (PRIIPs) Directive will also be required.

For sale aimed only at institutional investors only the foreign funds can only market when registered under the National Private Placement Regime (NPPR) as allowed for under Article 42 of AIFMD. Compared to the passport process for EU funds this is faster and requires provision of less documents. For marketing to institutional investors only the NPPR is a viable route.

What is the UK fund sales landscape likely to look at in a post-Brexit world? For this we look to the draft Statutory Instruments published by Her Majesty’s Treasury (HMT).

UCITS post-Brexit

The situation for UCITS post-Brexit is dealt with in Part 6 of The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018.

The first, and most important, thing to note is that the recognition of EU UCITS funds for sale to retail investors in the UK (currently recognised under section 264 of FSMA) will end.

There will be a 3-year “Temporary Permissions Regime” (TPR) enabling marketing for EU UCITS that:

  • Are already marketed into the UK prior to Exit Day
  • New sub-funds that launch in an umbrella where some sub-funds are already participating in the TPR

Existing funds must notify the Financial Conduct Authority (FCA) of their intention to participate in the TPR prior to Exit Day. New sub-funds must notify the FCA that they are going to utilise the TPR prior to the commencement of marketing in the UK. The TPR may be extended by HMT under certain circumstance by further periods of up to 12 months at a time. A funds participation in the TPR expires:

  • On expiration of the TPR generally
  • When the fund has been assessed and recognised under s272 of FSMA
  • When recognition under s272 of FSMA has been refused.

 The TPR may not be applied to:

  • Standalone funds that launch following the UK’s exit from the EU
  • Existing funds that are not registered to market into the UK under FSMA s264 prior to the UK’s exit from the EU and consequently have not applied for the TPR prior to the UK’s exit from the EU
  • Funds within a new umbrella fund
  • New funds within an umbrella fund that does not have any funds registered under the TPR

The intention is that any funds that wish to continue marketing into the UK once the TPR expires will have to register under FSMA s272, the route as any non-EU fund must currently follow. The s272 route will also apply to funds that do not qualify for the TPR or fail to notify the FCA that they will be utilising the TPR.

Table 1: Comparison of UCITS passport (into UK) vs FSMA s272 recognition

Regime UCITS Passport FSMA s272 Recognition
Used by EU UCITS funds Non-EU funds (currently) EU UCITS funds (post-TPR)
Allows Marketing to all types of investor, including retail Marketing to all types of investor, including retail
Registration/recognition fee £600 for standalone fund £1,200 for umbrella fund £8,000
Timescale Up to 10 working days Up to 6 months
Documentation UCITS attestation/certificate
Fund Rules
Annual Report
UCITS IV passport notification
Fund Rules
Annual Report
Comparison to UK Scheme
Management Agreement
Conflicts information
Investor protection details
Business or marketing plan
Form 272 (25 pages)

AIFMD post-Brexit

The situation for Alternative Investment Funds (AIFs) post-Brexit is dealt with in Regulation 14 of The Alternative Investment Funds Managers (Amendment) (EU Exit) Regulations 2018. Again, the passport regime (under Article 32 of AIFMD) would cease to function for all types of AIFs, including but not limited to:

  • European Venture Capital Funds (EuVECA)
  • European Social Entrepreneurship Funds (EuSEF)
  • European Long-term Investment Funds (ELTIFs)
  • Money Market Funds (MMFs) which use an AIF structure

For EU funds currently utilising the AIFMD passport process the draft SI proposes a similar TPR to that proposed for UCITS funds, which again may be extended beyond three years in certain circumstances by HMT. Again, the TPR will only apply to:

  • Funds that are in existence prior to “exit day”
  • Funds that are already marketed under the AIFMD passport into the UK prior to “exit day” and have notified the FCA that they will be making use of the TPR
  • New Funds that launch within an umbrella fund that already has at least one fund registered under the TPR

Any other funds will have to register under the UK NPPR (the same as non-EU funds currently do). Following expiration of the TPR an EU AIF that wants to continue marketing into the EU must be registered under the NPPR.

Table 2: Comparison of AIFMD passport (into UK) vs Article 42 NPPR

Regime AIFMD Passport Article 42 NPPR
Used by EU AIFs Non-EU AIFs (currently)
EU AIFs (post-TPR)
Allows Marketing to institutional investors Marketing to institutional investors
Notification fee Nil £250
Timescale Up to 20 working days Within 1 day
Documentation Notification Letter
Fund Rules
Details of the Depositary
Description of the AIF
Information of Master AIF
Article 23 Disclosures
Marketing information
Authorisation Statement
Notification form

Overall Effect – Closing the Gap

As can be seen above, and subject to any agreement between the UK and the EU on recognition of funds post-Brexit, the recognition “gap” between EU funds and non-EU funds will closed once Brexit has taken place and any Temporary Permissions Regimes have expired.

When marketing funds into the UK there will no longer be any benefit to using EU funds instead of non-EU funds. Furthermore, looking at the requirements for recognition of funds under FSMA s272 it would seem much less burdensome to restrict marketing of funds to institutions rather that registering them for full retail marketing.

It is also worth pointing out that under the Exemptions from the restrictions on the promotion of non-mainstream pooled investments (NMPIs) it is possible to promote funds ordinarily sold to institutional investors to:

  • Certified High Net Worth Investors
  • Certified Sophisticated Investors
  • Self-Certified Sophisticated Investors

Updated Data Protection Awareness Training (2019)

The team have been hard at work improving our already popular Data Protection Awareness training.

Whilst this post is a little late as the training went live in May 2019 the changes are outlined below.

  • Improved and expanded course content
  • Both video and text learning methods covering all information
  • More revision tools
  • Fourth section created from scratch to cover transitional changes included within the Guernsey law
  • Second exam covering transitional changes knowledge
  • Automatic certificate generation on successful completion

If you are interested in taking this course, please visit our Midshore Online Training website, or get in touch with one of our team.

2019 CISI Training Schedule now LIVE

We are pleased to announce that we now have a selection of Level 3 & 4 CISI Courses for 2019, available to take live and also on MOT.

The Courses we provide are part of the Investment Operations Certificate (IOC), Certificate in Investment Management (CIM) and the Investment Advice Diploma (IAD).

To view all of our events, please see: